Last week in the Wall Street Journal I read that several municipalities are considering filing for bankruptcy because they are cash strapped and can’t meet their bond payments. The following chart highlights the fact that from 1970 through 2008 (adjusted for inflation) U.S. government spending has risen 221% versus 32% for median household incomes.
City, state and federal agencies have trillions of dollars of debt outstanding, and it appears that they may not be taking these obligations seriously. Secondly, tax increases are a moot point when government spending is rising at seven times the rate of household incomes. Fears of unmanageable government debt have negatively impacted Greece’s stock market over the last year, and we in the U.S. need to be aware that these concerns could start impacting us personally via higher interest rates, slowing economic growth and stagnant investment returns. Ben Bernanke reinforced these concerns in comments he made in his semi-annual economic report to Congress this week, “I’m not anticipating anything in the near term, but it is conceivable that it could lead to a loss of confidence in aspects of the U.S. economy. It could affect the value of the dollar. And those things could directly or indirectly affect the state of the economy.”
Things that could benefit you
Not all is lost! The following are some statistics illustrating the strength of the U.S. economy:
- As of 10/31/2009, 15 of the 20 largest public companies in the world are based in the U.S.
- The U.S. is the world’s largest (single-country economy) and produces 23% of the world’s total output.
- Foreign based companies employ more than 5 million workers in the U.S. and pay them more than $400 billion in wages and benefits.
- Americans have won four times as many Nobel Prizes in sciences and economics as researchers from any other country.
- Recessions can be the catalyst for new business and innovation. For example, Burger King (1954) FedEx (1973), GE (1876) and Microsoft (1975) are companies that started during recessions. In addition, Diet Coke (Coca-Cola, 1982) compact fluorescent light bulbs (GE 1970s), the iPod (Apple 2001) and ketchup (Heinz, 1870s) are examples of just a few products that were created during recessions.
There are dramatic transformations taking place in the world that can have a profoundly positive impact for the U.S. and investors. The following are some examples taking place around the globe that can have a huge positive impact on us in the U.S.:
- Last year, China became the world’s largest car market and first-time buyers were responsible for at least 70% of car purchases in China (in 2008).
- Ten years ago, 1 out of 100 Russians had a cell phone account. Today, there are more cell phone accounts in Russia than people.
- From 2003 to 2008, India’s toothpaste usage increased roughly 40% per person. With a population of over 1 billion, in one year that would amount to 43 Olympic-sized swimming pools of toothpaste.
- Apple, Exxon Mobil, GE, IBM, Johnson & Johnson, Proctor & Gamble are examples of just a few U.S. companies that derive over 50% of their sales from outside the U.S. as reported by Factset (Reuters Fundamental database).
- Consider that in 1988 worldwide there were 189 companies with over $1 billion in sales, and 83% of them were U.S. companies. In 2008 there were 3,641 companies with over $1 billion in sales, however; only 28% of them were U.S. companies. As reported by Factset (Reuters Fundamental database – and figures being adjusted for inflation to 1988 dollars).
- McKinsey Global Institute estimates that over the next decade over 450 million newcomers are expected to enter the middle class in China and India alone. This surge of new consumers should provide a huge demand for many U.S. companies whose products are sold around the world.
Overseas economic growth can result in many new U.S. jobs and give our economy a tremendous boost in the years to come. In addition, as innovation and technological advances continue, they can provide solutions to such problems as energy dependence, the need for more food worldwide, better health care, etc.
Consumer confidence and the stock market in the U.S. are intertwined. One is dependent upon the other for sustainable advances. Thus, in 2010 patience is extremely crucial because we may see fits and starts as we begin to emerge from the economic malaise we’ve encountered over the past 18 months. The various economic challenges that face us were years in the making and a long-term / sustainable recovery will take time as well.
Quotes
“…the stock market has survived all kinds of difficulties – severe bear market, scandals, and events indirectly related to it like events of 9/11. So while the past decade was very tough, going forward, I’m very confident that equities will not just survive, but prosper. I think that stocks will remain constant with their historical role of building wealth over the long term and that diversified investments are the soundest method for investors to try and realize their goals.”
Charles Royce, President and CIO of Royce Funds 4th Quarter 2009 Advisor Review
“The soil will produce abundantly when fertilized well with elbow grease and good sense.”
Jacob Kindleberger, entrepreneur and statesman
“There are two things over which you have complete domination, authority, and control–your mind and your mouth.”
Molefi Asante, scholar
Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074
The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.
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